Contract disputes - expect them, be ready!

At some point, a dispute will spark in one of your business relationships and threaten your business - unless you’re armed with a thorough dispute prevention strategy.So, early in every one of your business relationships, before any disputes have had a chance to happen, make sure each of your contracts includes a specific plan involving all parties to provide a clear path for preventing and de-escalating disputes. 

This is a summary of a detailed article titled From Reaction to Proactive Action: Dispute Prevention Processes in Business Agreements, by J.P. Groton and Helena Haapio, describing preventive actions you can take now to prevent disputes.

James P. Groton, A.B., LL.B, Eversheds-Sutherland (US) LLP (Retired)

Helena Haapio, Associate Professor of Business Law, University of Vaasa; International Contract Counsel at Lexpert Ltd., Helsinki, Finland.

Incidents of business disputes have worsened over the years. Unfortunately, too many organizations, failing to recognize this risk, are paying high costs, wasting time, risking damaged business relationships, and trying to recover from dispute fallout. Ongoing research continues to show that minimal costs are involved in preventing and de-escalating disputes, compared with the very high costs of mediation, arbitration and litigation that are required if parties become embroiled in disputes.

What can happen after a dispute occurs? 

Parties in the business relationship tend to retreat from rationally resolving a pending dispute. One person may seek fast resolution. Another wants delay. One prefers avoiding publicity, but an opponent demands public exposure. If the parties can’t resolve their differences, it could get costly.

Being forced to resolve a dispute through lawyers, high dispute resolution transaction costs, mediation, arbitration, and litigation, you could: 

• Lose control of the dispute: control shifts to “strangers” to the dispute: lawyers, mediators, arbitrators, or a court.
• Suffer uncertain delays: at least several months (and in some jurisdictions several years) elapse before you get a litigated case to trial; appeals can lengthen the process by a year or more.
• Pay too much: dispute resolution transaction costs are expensive -- unless you don’t mind paying lawyers’ fees and escalating costs of experts and consultants.
• Face uncertainty about the outcome: often it’s very difficult to predict how a judge, appellate court or arbitrator will ultimately resolve a case.
• Suffer from a lack of expertise: it is difficult to find judges with the qualifications to resolve such issues.
• See your personal business aired in public. Court filings and proceedings are matters of public record. They can be reported in the media.
• Experience your business relationships disrupted. Hostility always hurts business!

Advantages of dealing with potential disputes before they occur include many hidden opportunities to strengthen your business relationships and uncover possible blind spots.

Benefits include: 

• A clear path to solving problems.
• Insight into possible red flags. If, for example, the other party does not want to agree to have an efficient dispute prevention and resolution system, you get the chance to review carefully how you negotiate other terms of the agreement - or whether you want to enter into the relationship at all.
• Trust: parties who show a willingness during the negotiations to set up a rational, fair and prompt dispute resolution demonstrate that they you value integrity, leading to a trusting relationship.
• International relevance: setting up a dispute prevention system that avoids the uncertainties of a foreign legal system will likely have special relevance in an international transaction.

Take a positive approach

• Anticipate, think ahead, be proactive.
• Realize problems and unexpected surprises will likely happen.
• Establish a process that addresses every problem immediately.
• Concentrate on fixing the problem, not the blame.
• Collaborate and cooperate.
• De-escalate friction.
• Use flexible processes that can be adapted to any potential situation.
• Provide incentives to encourage constructive behavior.

Try using an objective motivator

Imagine your organization entering into a joint venture with another business to develop and manufacture a useful product in time to meet an urgent market demand. The possibilities for disagreement at any stage of this process are legion -- any delay will harm the partnership.

One way to establish a process that will resolve problems promptly and prevent delaying important moves forward would be -- at the beginning of the joint venture -- to identify and agree on an experienced, neutral business person, respected by both parties. This person will be available for the life of the venture, will be kept advised on the progress of the venture, and be available on short notice to confer with the parties if they experience a problem they can’t immediately resolve.

Experience has shown that the objective advice of a neutral advisor has a profound influence on the thinking of each party, generally resulting in mutual agreement. If time is really of the essence, the advisor could be given the power to make an immediate binding decision on any issue the parties can’t agree on. Even more significant, the mere availability of this person tends to cause each party to look at every problem through the eyes of the advisor rather than the trivial interest of ether party. This approach often results in parties coming to agreement and not even needing further advice.

AUTHORS

James P. Groton formerly led the Construction Dispute Prevention and Resolution practices of his law firm. Throughout his career Jim has embraced and used every conceivable ADR process.  He has received many awards for his service as lawyer, problem solver, mediator and arbitrator.  His website, www.jimgroton.com, is titled: Proactive Prevention, Control, De-escalation and Real Time Resolution of Disputes.

Helena Haapio works as Associate Professor of Business Law at the University of Vaasa http://www.uva.fi/en/profile/?view=1041511 and as International Contract Counsel at Lexpert Ltd http://www.lexpert.com/, Helsinki, Finland. She helps her clients use contracts and the law proactively to achieve better business results, balance risk with reward, and prevent problems. She also acts as arbitrator in cross-border contract disputes. As the co-leader of the Nordic School of Proactive Law http://www.juridicum.su.se/proactivelaw/main/ and of the ProActive ThinkTank https://www.iaccm.com/gp/proactive she works with colleagues and designers to transform contracts from legal instruments to valuable business tools. She is the Author of Next Generation Contracts: A Paradigm Shift (2013) and Co-author of A Short Guide to Contract Risk (2013) and Proactive Law for Managers (2011).

Related IACCM works and associations by the authors:

• Zero disputes? Collaboration lessons that businesses can learn from the construction industry, Groton, Dec 2007
• Converting the construction industry’s ‘disputes potential index’ into a ‘success potential index’ for any kind of business relationship- Groton, Feb 2008
• Business Success and Problem Prevention through Proactive Contracting - Haapio, in Peter Wahlgren (ed.), A Proactive Approach, Scandinavian Studies in Law, Vol. 49, 2006.
• For more book chapters and articles, see authors’ publications at SSRN, Academia.edu and ResearchGate
• ProActive Think Tank - Authors were both among the founders of the ThinkTank. Starting up with only 12 people, ThinkTank is now over 1,200 and counting!

{{cta('c282a356-5120-4b12-b94b-0eb0e425ee28','justifycenter')}}